Edition: March - May 2015
RETAIL DISTRIBUTION REVIEW 3
Set to shake
Pensions industry will also rattle, but how will it roll?
National Treasury’s documents looking to discuss improvements to the pensions industry highlight the need to better align the incentive structures of advisors to their clients. The Retail Distribution Review (RDR) looks to address many of the perceived ills.
Despite being focused on the individual investment and insurance markets, RDR will significantly change the institutional pensions industry. It will be asking more of pension-fund trustees in considering a broader fiduciary duty to funds’ members.
RDR looks to move the individual investment and risk market away from the existing commission-based system to one focused on charges, aligned to activity, that must be disclosed and agreed to by clients. This effort to level the playing field between all players should make the high net worth individual market hotly contested.
At the same time the middle income market will be dominated by those advisors best able to quickly assimilate financial solutions for clients and fulfil their needs at low cost. There is recognition that advice on the new proposed charging basis may be prohibitive in the lower- income market and therefore a different remuneration model may be appropriate.
The consequence of this legislation in the UK led to nearly a halving of advisors and the subsequent exit of a number of large providers who’d adopted a compliance approach rather than looking to align their business practices to the principles set out in the legislation. Should SA follow a similar path, it seems many pension-fund members will become reliant on their trustees because advisors may not adequately service this market..
The Treating Customers Fairly (TCF) framework, set out by the Financial Services Board, goes further. It seeks to ensure that conduct standards of advisors and product providers are appropriate, extending these requirements to trustees.
Both the TCF and RDR reforms look to make advisors and product providers to funds responsible for member outcomes, effectively looking through the pension-fund wrapper. This will create an interesting dynamic until legislation is suitably aligned to ensure that trustees deliver their intended outcomes and allow product providers wanting more information to better tailor solutions for a heterogeneous group of fund members.
The vacuum of advice should be filled by employers and trustees considering a broad range of financial solutions to this soon-to-be-underserviced middle market. They have both the buying power and knowledge to ensure that appropriate and costeffective solutions are available.
Another consequence of RDR is the categorisation of advice. There are many convoluted business arrangements, support and ownership structures in our industry that will make qualifying as an independent advisor nearly impossible to achieve this standard and still in reality have the resources to provide adequate advice.
Many trustees will now have a better understanding of advisors’ business models and therefore be in a better position to assess the appropriateness of the guidance given.
*Burger is an executive in the ‘large corporate segment’